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(P&I) Big Hat. No Cattle.

November 8, 2013

Drama. Pension plan consultants – who are mostly actuaries – have only one medicine for what troubles us, and it doesn’t work (Investment & Pensions Asia, September 27, 2013, Risk management challenges for pension funds).

Pennies in Front of Bulldozers Courtesy: TD Ameritrade

“Pennies in Front of Bulldozers” (LTCM 1998) and a “Line Dance”
Courtesy: TD Ameritrade

What began in the 80’s as an effective way to manage price and delivery risk in commodities such as corn, oranges, hogs and oil through the purchase and sale of forward contracts, has morphed into an industry that hedges risk with risk, and the only “risk” that it understands is “volatility risk” which is not even an “investment risk”.

And as is evident from the chart on the right that if it can be drawn, it will be drawn, and as Mr. Buffett has famously said, it can be read just as well rotated 180º which is the other side of our “trade” in any case.

But we know this don’t we? We know that the options pricing model of Black and Scholes assumes markets that don’t exist and that it “squeezes” risk to the tails when applied to the real markets; and we know that the Capital Assets Pricing Model (CAPM) and Modern Portfolio Theory (MPT) are fictions; and that stocks are not The God Stock; and that markets are unreliable and unpredictable.

Liabilities & Assets

Liabilities & Assets

These “tools” are done and they can’t be fixed but the “problem” remains (Reuters, November 5, 2013, Derivatives industry under the gun to amend contracts).

It’s estimated (ibid, Reuters) that there is currently $630 trillion dollars in the “float space” consisting only of derivatives and derivatives on derivatives but if “derivatives on derivatives” is an asset, why not derivatives on “derivatives on derivatives” and so forth.

All Hat No Cattle

We need to get on our horse because we’re not nearly doing our job.
Courtesy: C.M. Russell, 1904

When we put it that way, we’ve fallen far short of the potential because if R is what is owed to us and P is what we owe, then the “float space” is as large as R×P and constrained only by the “cash” that we need to show in order to effect a “contract”.

Wow! Let’s start over before Wall Street figures that out (Barron’s, July 6, 2013, BlackRock: Volatility Is an Asset).

Beginning at the beginning, an “investment” is just and only the “purchase of risk”, a concept with which we are entirely familiar because the business of insurance is the “purchase of risk”.

And like anything else that we might purchase, we ought to know the price of it, that is, we ought to know the “price of risk“.

And the “risk” is not volatility but that we might not get our money back – 100% capital safety – or obtain a hopeful but not necessarily guaranteed return above the rate of inflation.

For more information and additional references, please see our recent Post, The RiskWerk Company Glossary.

And for more on what risk averse investing has done for us this year, please see our recent Posts on The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class actionLa Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100.

And for more on what’s Working in AmericaBig OilShopping in America or Banking in America, to name just a few.


We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond
Alpha-smart with 100% Capital Safety and 100% Liquidity
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to


Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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